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If you’ve been injured in an accident and received a personal injury settlement, you might be wondering if you have to pay taxes on that money. The good news is, most personal injury settlements are not taxable by the federal government. However, there are some exceptions and factors that could affect your tax liability. In this blog post, I’ll explain how to avoid taxation on your personal injury settlement and what to do if you receive a taxable award.

What Is a Personal Injury Settlement?

A personal injury settlement is a payment that you receive from the person or entity that caused your injury. You can either negotiate a settlement with the insurance company or the defendant, or you can file a lawsuit and win a verdict in court. A personal injury settlement is meant to compensate you for your losses, such as medical expenses, lost wages, pain and suffering, and emotional distress.

How Are Personal Injury Settlements Taxed?

According to the IRS, personal injury settlements are not taxable as long as they are based on a physical injury or sickness. This means that if you suffered observable bodily harm, such as a broken bone, a burn, or a concussion, you don’t have to pay taxes on your settlement. This also applies to the portion of your settlement that covers emotional distress, as long as it stems from the physical injury or sickness.

However, there are some situations where your personal injury settlement could be taxable, such as:

Taxable Medical Expenses

If you deducted medical expenses related to your injury on your previous tax return, you have to pay taxes on the amount that you deducted. This is because you can’t double-dip and benefit from both a tax deduction and a tax-free settlement.

Taxable Punitive Damages

If you receive punitive damages, which are meant to punish the defendant for their wrongdoing, you have to pay taxes on the entire amount. Punitive damages are usually awarded in cases where the defendant acted with malice, fraud, or gross negligence.

Taxable Emotional Distress

If you receive compensation for emotional distress that is not related to a physical injury or sickness, you have to pay taxes on that amount. For example, if you sue your employer for harassment or discrimination and receive a settlement for emotional distress, that money is taxable.

Taxable Interest

If you receive interest on your settlement, you have to pay taxes on the interest amount. Interest is usually added to your settlement if there is a delay in payment or if you receive your settlement in installments.

How to Avoid Taxation on Your Personal Injury Settlement

The best way to avoid taxation on your personal injury settlement is to make sure that your settlement is based on a physical injury or sickness and that it covers your actual losses. Here are some tips to help you do that:

• Keep track of your medical expenses and lost wages that are related to your injury. You can use these records to justify the amount of your settlement and to avoid paying taxes on the medical expenses that you didn’t deduct.
• Negotiate with the insurance company or the defendant to allocate a larger portion of your settlement to non-taxable categories, such as physical injury, pain and suffering, and emotional distress. You can also try to reduce or eliminate the amount of punitive damages or interest that you receive.
• Consult with a tax professional and a personal injury lawyer to understand the tax implications of your settlement and to plan accordingly. They can help you minimize your tax liability and maximize your net recovery.

Conclusion

Receiving a personal injury settlement can be a relief after going through a traumatic experience. However, you don’t want to end up with a surprise tax bill that eats up your compensation. By following the tips above, you can avoid taxation on your personal injury settlement and keep more money in your pocket.

I hope you found this blog post helpful and informative. I’m here to help you get the justice and compensation that you deserve.

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Ghazala Siddique